In Apple’s War on Taxes, Surrender Costs $28 Billion

Apple CEO Tim Cook. Photo: Brian X. Chen/Wired

With the U.S. Senate reportedly finishing an investigation into how Apple and others dodge taxes, and with Apple fighting for an officially sanctioned tax holiday, it’s worth taking stock of Apple’s tax liabilities. Dealing with the tax man, it turns out, could cost the company upward of $28.5 billion or send it on a shopping spree abroad.

Even as Apple lobbies for corporate tax amnesty, it has accounted for some of its potential future tax bills in filings with federal securities regulators, a move that helps Apple avoid embarrassing earnings re-statements if it is later forced to pay taxes. In the filings, Apple says it had $14.7 billion in deferred tax liabilities overseas as of Sept. 29, when its fiscal year ended. In a footnote, the company acknowledges there’s another $13.8 billion in “unrecognized deferred tax liability” from money it intends to keep perpetually out of the U.S. If the company ever decides to bring all its money home, and then pays taxes on it at currently anticipated rates, the bill would come to $28.5 billion, plus additional taxes on any profits moved overseas since Sept. 29.

Apple’s big tax liabilities are important considerations when thinking about the company’s vaunted cash and securities hoard, which reached $121.3 billion three months ago. Fully $82.6 billion of that money was held by Apple’s foreign subsidiaries, which collect much of Apple’s profit as part of a popular tax avoidance scheme in which offshore subsidiaries hold a tech company’s intellectual property and the U.S. parent then licenses the intellectual property back. Thanks to such maneuvering, Apple paid just 1.9 percent on foreign earnings in its last fiscal year.

Meanwhile, Apple is planning to distribute $45 billion in dividends over the next three years. If history is any guide, Apple’s profits will keep its cash replenished despite those payouts. Yet history also teaches that Apple’s tax liability will keep growing as it funnels more money abroad.

“As you can see from Apple’s numbers, every year it grows and grows and grows, and it’s getting to be a very unwieldy situation,” says Martin Sullivan, a former Treasury Department economist who is now with the news publisher Tax Analysts. “The good news is, gee we’re really good at tax planning, we’re paying hardly any tax to the IRS and we have high profits for Wall Street. But the bad news is we can’t get the cash without paying the tax, and that’s a big problem, especially if you want to do a domestic acquisition or pay some dividends.”

Apple has been hoping a tax holiday will free up its overseas assets. Along with other big names in tech like Google and Microsoft, Apple is part of the “WIN America Campaign,” which reportedly hired 160 lobbyists to push its stated agenda of repeating the “one-time” 2004 corporate tax holiday bestowed by Congress. That holiday simply accelerated the offshoring of profits, Sullivan says, as corporations bet heavily on a sequel.

But voters have grown more hostile to corporate interests since financial markets melted down in 2008. A senate subcommittee is investigating tax avoidance among tech companies, with the investigation reportedly focused on Apple and close to completion. Sen. Carl Levin, the Michigan Democrat leading the inquiry, has said offshore tax dodging by corporations is “one significant cause of the budget deficit, and adds to the tax burden that ordinary Americans bear.” His subcommittee’s recommendations are expected to influence near-term Congressional changes to the tax code.

“They were expecting to have a holiday but they may get the exact opposite — they may get a hammer blow from Obama,” says Sullivan, referring to tax holiday proponents generally.

Apple would still have other options. For example, it might acquire an overseas tech company, allowing it to keep its assets beyond the reach of the IRS and yet put them to work.

“Absent some sort of ability to repatriate those earnings economically, it’s almost certain they will remain outside of the U.S.,” says corporate tax lawyer Robert Willens. “If all $80 billion of unremitted earnings were actually (or constructively) repatriated, the company would incur, believe it or not, $28.5 billion in U.S. taxes.”

But Sullivan thinks Apple – ever the innovator – might come up with clever way to bring the money home in a shielded fashion, for example through a loan from an overseas subsidiary to the U.S. parent.

Or Apple might just pay the $28.5 billion to protect its reputation as a better, more socially conscious sort of company. The company’s tax avoidance schemes are commonplace in the industry, but still leave the company looking like “a ruthless tax-avoiding conglomerate” in the words of Max Wolff, chief economist of Greencrest Capital.

Apple, which did not respond to requests for comment, defended itself to The New York Times by saying “in fiscal 2012 we paid $6 billion in federal corporate income taxes, which is 1 out of every 40 dollars in corporate income taxes collected by the U.S. government.” Those are big numbers, but Apple has pleased Wall Street by funneling even more money offshore and out of the U.S. Treasury’s reach. To avoid investor blowback, Apple needs to find an innovative way to get its assets back into the country fully intact. Good luck building an iconic ad campaign around that.